Fresh British data shows corporate Britain suffered a 10-year record level of bankruptcies in the third quarter of this year, as this article explains. However, before assuming the worst, a good question to always ask when reading stories like this is – how many new business starts were there over the same period? And you know what, after a lot of searching around on Google and elsewhere, it is mighty hard to come up with reliable data. (I would be grateful for help thereon).
But it matters in knowing what the figures are. Because, as the American business writer George Gilder noted more than a decade ago in his excellent book, Wealth and Poverty, if a country has a lot of bankruptcies, it does not necessarily mean an economy is in trouble. So long as bankrutpcies do not outstrip new company formation, there is no problem. In fact, having a lot of bankrupticies is, paradoxically at first sight, a healthy sign. It means folk are taking risks, trying ideas. Some of those gambles will go splat. But even then the sounds of firms hitting the ground with a thud generates knowledge for the rest of the economy. Or to borrow from Karl Popper, bankruptcies are like falsifying a theory in science. You still learn from when an idea is challenged and proven not to work.
So, the latest figures maybe cause for concern. What we really need to know is whether, in Blair’s corporatist and ever more highly-taxed Britain, the animal spirits of entrepreneurs are given full rein.
And I can guess what you good readers out there think of that!
Johnathan,
You’re absolutely right. Business bankruptcies are part of the “creative destruction” of capitalism — although they embody not only the risk-taking aspect, but also the winnowing of the badly-managed, weak, or bad ideas which are an integral part of the process.
One thing to bear in mind, when looking at business startup and failure statistics, is that the identities of the people involved in each case are not usually recorded.
In the US, I have heard that three out of five new businesses fail in the first year or two. This is usually quoted to discourage hopeful new business owners. What I have never seen is the number of successful new businesses that are started by people who have previously failed at business startups.
While there are undoubtedly many who try once, fail, and are so shaken by the experience that they never try again, I suspect a tuition of failure may be the best preparation for eventual success and further survival and growth. If one is tough enough to come back and try again, perhaps repeatedly, the odds on eventually making it have to be pretty high.
I doubt anyone will ever collect the statistic, but the percentage of repeat attempters among the startups and bankruptcies would be very revealing of an economy’s strength.
The fact that business startup figures are so hard to find for Britain tells you all you need to know about how receptive the powers that be are to entrepeneurs.
There are whales where I live. In recent years there has been an increase in the number of whales that have been washing up dead on the beach. Some people have assumed this means some terrible evil thing is happening in the oceans, killing off the whales. The reality of it is, there are more beached whales because there are more whales period. Conservation efforts have begun to yield results, and the whale population is thriving. So the scary sign, more dead whales, is actually proof that the whales are doing better.
This seems like an identical paradox as the one Gilder mentioned. Is there a word for this kind of fallacy?
It depends on the local rules and local culture too. Bankruptcy is much more debilitating in some places than others, so people and businesses with similar problems may be more or less likely to choose that route depending where they are.
Comparatively speaking, US bankruptcy rules are great for debtors (and lawyers, inevitably) not so wonderful for creditors, vis-a-vis British ones–which are good for the taxman and (and accountants, inevitably), horrid for the rest.
Since British bankruptcy rules are about to change for individuals (and get easier on the debtor), there may well be a slowdown followed by a spike as the new rules come in without any sudden change in economic conditions.
Last I heard it was 2/3 fail within 2 years in the US. But that more than half of the failures go on to start another company within the next 5 years.
The contrast in some other country’s laws with the kindness of US law to debtors cannot be over emphasized. And it’s not just bankruptcy law either.
A former long-term girlfriend of mine (from Guatemala) freaked out badly the first time during the years we lived together that it looked like we were going to be late with a monthly bill.
I finally got her to tell me what she was freaking out about, and it was because of the bill. I asked her what she thought was the worst that could happen, and she was fearing debtors prison (which they still have in that part of Latin America where she lived till 13).
I laughed and explained that worst comes to worst, we’d get a bad mark on our credit report, and the market would take care of things by charging us more the next time we wanted credit.
I explained that the freedom to fail being an important part of the Pursuit of Happiness that we had banned debtors prison here. The twinkle in her eyes as it sunk in and she got it about the American Dream for the first time made me more proud to be an American than anything else that’d ever happened to me.
Next thing out of her mouth: “WOW, it really IS different here!” 🙂
The woman was in mortal terror over less than $200 before I set her straight on the matter.
Thanks for the comments. I am still searching for data on business starts.
Ancedotally, the venture capital industry in Britain seems to be picking up, from what I can see in some reports, so maybe things are brightening up a bit, at least in the UK and in bits of Europe.